Australian Securities and Investments Commission v Adler [2002] NSWSC 171 is both a unique and yet very complicated. This case involved the breach of a range of provisions related to the duty of directors laid down in the CA or the Corporations Act, 2001 (Cth). A few of the duties, which were breached in these cases were related to the use of information in a proper manner, duty of care and diligence and the various other relating to the directors’ and officers’ duties (Baxt, 2005). The following parts cover a detail about the display of inappropriate behavior by the Adler, who was the non-executive director of the company, along with the various sections which were contravened by Adler of the Corporations Act. A discussion would also be carried on the resultant actions which had to be faced by Adler as a result of his actions. Lastly, this discussion would end by indicating the lessons which can be learnt from this case, for such individuals who manage the companies in the nation.
In this case, an unsecured, as well as, undocumented payment was made by HIHC (HIH Casualty and General Insurance Ltd) to the value of $10 million loan to (Pacific Eagle Equity Pty Ltd). The company PEE was controlled by Adler, which was a trustee of AEUT (Australian Equities Unit Trust). Adler was not only the executive director of HIH, but also was a substantial shareholder of HIH, through another company, i.e., Adler Corporation Limited. After the loan was received by PEE, it became the trustee of AEUT. The 10 million dollar loan by HIHC to PEE was later on applied towards the subscription of HIHC’s 10 million dollar worth share of the units of AEUT (Justis, 2017).
The shares of HIH were then purchased by PEE, and these shares were listed on the stock market and depicted a value to the amount of four million dollars. These HIH shares were subsequently sold at a loss of two million dollars by PEE. HIH’s shares were purchased by PEE, so that a false impression could be given to the stock market regarding the notion that the company, i.e., HIH was in a good position, as a result of the strong condition of the company. Another purchase occurred by PEE in form of purchase of unlisted shares of the technology and communication companies from Adler Corporation and the value of this was four million dollars. This purchase was deemed as an entirely loss based investment (Australian Institute of Company Directors, 2017).
Adler, under the trust, was forwarded an amount of two million dollars by AEUT. Though in this case, the board was not aware about any of these transactions. Further, no shareholder approval, as required by the law, was taken in this case. Along with this, no disclosure was made to the board and the investment committee of the HIH also had no clue about these transactions. No security was given for the loan and there was also an absence of proper documentations, as was required by the law. These laws were not followed so that the attention could not be brought at the transactions being carried on, in the purview of the other directors (Cassidy, 2006).
As per section 9 of the Corporations Act, a person appointed in the company to work in the capacity of alternative director or a director, regardless of the name of the position which that person holds, is a director. A person can still act as a director when he has not been appointed as one. This happens in cases of the individual being a de factor director or in such cases where the individual is a shadow director, whereby the other directors of the company act on the directors of such individual. Only when an individual is established as a director of the company, can they be held liable for a breach of the duties of directors. This section also highlights who can be deemed as an officer and includes those individuals who have senior position in the company, at the level of the board. The officers also have similar duties as directors due to their power of affecting the company’s business in whole or partial manner (Federal Register of Legislation, 2017).
In the quoted case, Adler was the company’s director as per section 9 of CA, even though he had not been formally appointed as a director or an officer of the company. Adler had decision making powers, which are apparent from the role he played in both the holding and the subsidiary, as being the director and the member of the company. Further, decisions had the power of impacting the business. In addition to this, he was constantly updated on the basics of this business, which made him a director in the company, as per the quoted section (Australasian Legal Information Institute, 2017b).
As per section 180(1) of this act, the directors, in addition to the officers of the company, are required to discharge their obligations and use their authority in such a way, which depicts care and diligence, which would have been undertaken by a prudent person in matching scenario, having matching position. The individuals who are deemed as executive directors are involved in company’s daily management. And so, these individuals have been given special responsibilities due to their position, as well as, due to the knowledge which they have regarding the operations of the company. Conversely, non-executive directors of the company work partly for the company, and have regular though not daily involvement in the operations of the corporation (Australasian Legal Information Institute, 2017a).
In this case, Adler had clearly breached section 180(1) of the CA. this is evident from the profits he made for his personal benefits. He did not take care or exercise diligence when he carried on the activities of hiding the truth from the board and failed in protecting the improper transactions which were going on. Apart from him, in this case, William, who was the managing director of HIH and HIHC also, breached this section as he did not stop the loan which HIHC gave to PEE. Along with this, the finance director of HIH, Fodera also breached as he failed in discussing this proposal regarding the loan to PEE, or to the board or investment committee of HIH (Australasian Legal Information Institute, 2017b).
Section 180(2) contains the provisions regarding business judgment rule, which acts as a defense to the directors and the officers in case a breach of 180(1) is claimed by the parties. As per this section, when a business judgment is made by the director or other officer, they cannot be held liable for breaching the duties mentioned in 180(1), provided certain requirements are fulfilled. This includes the lack of material personal interest in the judgment matter. In addition to this, the officers and directors have to take reasonable steps towards making certain that the decision was not only reasonable, but also in the company’s best interest and the made decision was done in an informed manner (WIPO, 2015).
The reason why such defense is given to the directors is that sometimes, a decision may be taken in a good faith but may result in a loss. So, when a decision is taken in an honest and rational manner, the same demands protection (Gonski, 2015).
As has been highlighted earlier, all three of the defendants had breached section 180(1). Further, none of them could rely upon the defense given in 180(2). For Adler, the conflict of interest position which he had, as a result of the investment decision from HIHC in PEE to the value of ten million dollars breached the requirements covered under section 180(2). For Williams, due to his failure in taking the proper safeguards as required under the law, the requirements stated in section 180(3) were not met. And even if these would have been fulfilled, the material personal interest of his in the transactions would fail the purpose stated in section 180(2)(a) of the CA (Armstrong Lawyers, 2007). Lastly, even Fodera could not use this defense due to the lack of making a reference regarding the transaction which took place between HIH and PEE to the investment committee or the board of HIH (Australasian Legal Information Institute, 2017b).
Another section breached by Adler was section 181 of CA. as per this section, the director shave to act in good faith, with proper purpose and keeping the best interest of the company supreme, while they discharge their obligations and use their authority (Armstrong Lawyers, 2007). The view of a reasonable person is taken to judge what is good faith, best interest and proper purpose (ICNL, 2017).
Adler breached section 181(1) of this act, as he did not carry out his obligations and use his authority in a manner which could be deemed as good faith or in the company’s best interest. The evidence of this can be seen in the undertaken transactions by him in HIHC, PEE and HIH, which were for his personal interest and were put for an improper use (Australasian Legal Information Institute, 2017b).
Section 182 of this act relates to the use of the position which a director or officer has in a company, in such a manner, which proves to be detrimental for the company, or results in another person or the same person attaining an advantage for themselves. Further section 183 of this very act prohibits the use of information in an improper manner. This section dictates that the directors and the officers of the company should refrain from making a use of information of the company in a manner which can be deemed as a misuse, and which proves to be detrimental for the company, or results in another person or the same person attaining an advantage for themselves (Plessis, Hargovan and Bagaric, 2010).
In this case, there was a clear breach of section 182 by Adler. He used his position as being a director of HIH and PEE in an improper manner, and as an officer of HIHC so that Adler Corporation could be given a gaining spot. William accompanied him in this breach by helping Adler put Adler Corporation in this position, for the reasons of Williams being director of both HIH and HIHC (Australasian Legal Information Institute, 2017b).
There was an improper use of position by Adler as the director of PEE, as he acquired shares from Adler Corporation of unlisted capital at a cost price, in such a case where there was an absence of independent valuation for these ventures. This allowed Adler and his company, Adler Corporation, in excluding them from such operations which were deemed as unviable in a commercial manner. Adler knew that there were cash flow problems in these businesses and that these businesses had a high chance of collapsing in the coming time. Adler failed to disclose his material personal interest to the board of the company. Hence, all this determines the improper use of company’s information and the resultant breach of section 183 (Australasian Legal Information Institute, 2017b).
The last section which was breached by Adler was section 208 of CA, which requires a shareholders’ approval for such situations where a financial benefit is discharged in favor of a related party. Such transactions are only allowed at arm’s length (IMF, 2012). Adler did not take any shareholders’ approval and the transactions were also not done at arm’s length. Hence, this section was also breached (Segalla, 2017).
As a result of these breaches, Adler was disqualified for a period of twenty years from being a director in any company. In addition to this, a fine to the value of $450,000 was also levied on Adler (Australasian Legal Information Institute, 2017b).
The case of ASIC v Adler is a leading case in Australia, which reminds the companies and directors in the nation regarding their responsibilities of ensuring that the company adheres to an effective framework of corporate governance (Hooper, 2011). A corporate governance framework is required to safeguard the corporations from the improper actions, which due to the reasons of being the director in the company, can be undertaken by an individual. A substantial number of checks and balances are required to guarantee that the system is not easily breached or bypassed (Paolini, 2014).
References
Armstrong Lawyers. (2007) Directors’ Duties. [Online] Armstrong Lawyers. Available from: https://www.vcta.asn.au/documents/item/400 [Accessed on: 13/05/17]
Australasian Legal Information Institute. (2017a) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 13/05/17]
Australasian Legal Information Institute. (2017b) ASIC v Adler and 4 Ors [2002] NSWSC 483 (30 May 2002). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2002/483.html?stem=0&synonyms=0&query=asic%20v%20adler [Accessed on: 13/05/17]
Australian Institute of Company Directors. (2017) The Adler Williams cases on appeal Law Reporter. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2000-to-2009-back-editions/2004/february/the-adlerwilliams-cases-on-appeal-law-reporter [Accessed on: 13/05/17]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, NSW: The Australian Institute of Company Directors.
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 13/05/17]
Gonski, D. (2015) I Gave a Gonski: Selected Speeches. London: Penguin UK.
Hooper, M. (2011) The Business Judgment Rule: ASIC v Rich and the reasonable-rational divide. [Online] Bond University. Available from: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1021&context=cgej [Accessed on: 13/05/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 13/05/17]
IMF. (2012) Australia: Basel Core Principles for Effective Banking Supervision—Detailed Assessment of Observance. Washington DC: International Monetary Fund.
Justis. (2017) ASIC v Adler & 4 Ors 2002. [Online] Justis. Available from: https://app.justis.com/case/asic-v-adler-4-ors/overview/c5CJn0CdnXWca [Accessed on: 13/05/17]
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA, USA: Edward Elgar.
Plessis, J.J.D., Hargovan, A., and Bagaric, M. (2010) Principles of Contemporary Corporate Governance. 2nd ed. Cambridge: Cambridge University Press.
Segalla, S. (2011) Checklist for directors’ duties. [Online] Find Law. Available from: https://www.findlaw.com.au/articles/1303/checklist-for-directors-duties.aspx [Accessed on: 13/05/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 13/05/17]
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